Chapter 2. The Case for Cyclical Asset Allocation

If you read enough of today’s economic literature, you find the financial community has come to agree that, on average, small-cap and value investments outperform their large-cap and growth cousins.[1] Using monthly returns for the various asset classes since 1975, I find some interesting data that can put these rather firm conclusions into question, while also surprising many investors who came of age in the 1990s.[2]

Not that small-cap and value investments haven’t performed—they’ve done extremely well. In the three decades since 1975, small-cap stocks have not only outperformed large-cap stocks, they’ve beaten all other asset classes. Figure 2.1 shows that, on January 1, 1975, $1 invested in ...

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